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The Reserve Bank of India (RBI) could extend its rate-cut cycle beyond August 2025 if economic growth weakens, according to a report by ANZ Group.
The report predicts that the central bank will implement three additional rate cuts of 25 basis points each by August 2025. However, it highlighted a key risk to this outlook, which includes extreme weather conditions. Disruptions caused by adverse weather could impact food supply and prices, affecting inflation and monetary policy decisions. If economic growth slows further and weather conditions remain favourable, the rate-cut cycle could be extended beyond August 2025. "If growth turns out to be weaker and weather remains conducive, the rate-cutting cycle can be extended. We expect the RBI's liquidity support to persist to aid the transmission of the rate cuts to the economy," the report stated. The report also noted that the Central Bank will continue to provide liquidity support to ensure the effective transmission of policy rate cuts. In February 2025, the RBI reduced its policy rate by 25 basis points while maintaining a neutral stance. Since then, inflation has declined unexpectedly, creating more room for the Central Bank to support growth. To ensure that rate cuts effectively reach different sectors of the economy, the RBI is expected to maintain its liquidity support. This approach will help stimulate borrowings and investment, providing further momentum to economic activity. On the fiscal front, the government has introduced a contractionary budget aimed at reducing the fiscal deficit to 4.4 percent of GDP in the financial year 2025-26 (FY26). This reduction is driven by cuts in revenue spending and higher tax collections. According to the report, an economic slowdown remains a key risk to achieving the fiscal target, but the government is expected to manage the situation effectively. Capital expenditure has been maintained at around 3 percent of GDP, which is considered both healthy and achievable. Looking ahead, from FY27 onwards, the government will shift its fiscal focus from the deficit target to managing the debt-to-GDP ratio. The long-term goal is to reduce debt to 50 percent of GDP by FY31. This suggests that the fiscal deficit ratio may not need to drop below 4 percent of GDP in the coming years. The report indicated that while fiscal discipline remains a priority, the government is balancing its budget strategy with economic growth considerations. If growth weakens further, authorities may adjust their policies to maintain financial stability. Overall, with continued liquidity support from the RBI and fiscal measures in place, the Indian economy is expected to navigate the evolving economic landscape while ensuring stability and growth. (ANI)
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